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Economic Weekly: Upside risks building

Economists are well versed in espousing downside risks. To be sure, these remain plentiful. We’re in a global pandemic after all. But it’s also important to acknowledge the positives. And it’s actually these upside risks that are looking more pertinent as the economic data has rolled in over the past few weeks.

The global backdrop, while patchy, is looking better by the day. COVID hotspots remain, with the tragedy in India particularly troubling. But global growth as a whole is now expected to expand a strong 6.3% this year. China and Asia are out in front. But the impressive turnaround in the fortunes of the US and UK is certainly bearing out the ‘who vaccinates wins’ thematic. Three quarters of the population in those countries have now had at least one vaccine dose, enabling a more rapid economic reopening. Forecasters in the UK, for example, now expect GDP growth to exceed 5% both this year and next.

The steadying in the global economy is bolstering demand for commodities generally, including our own export commodities. In fact, there’s something of an export price boom underway – it’s just that the housing boom tends to attract all the column inches. Global prices are holding around the highest level in seven years. And thanks to a restrained currency, prices in NZ dollar terms are not far from the highest level ever. We think prices will hold up or even push a little higher this year. The income windfall for NZ’s agriculturally-exposed regions is providing the foundation upon which NZ’s economic recovery is being built.

Against this backdrop, confidence in the economic upturn is growing. Last week’s ANZ business confidence survey saw investment and employment intentions continue to ratchet higher. The former are now at 4-year highs, and suggestive of GDP growth miles ahead of our forecasts (chart ‘o’ the week).

Stretched capacity, shortages of labour, and spiralling costs are flies in the ointment we’ve discussed before. Business surveys are pointing to these things worsening. Cost and pricing intentions are at the highest levels on record. We’re still of the view the impacts on inflation will mostly be temporary, but we’re keeping an eye on it. By contrast, the turn higher in wage inflation we expect this year will proffer more of a sustained, albeit modest, inflationary impulse. Last week’s labour market figures provided support for this view. Unemployment printed below market/RBNZ expectations at 4.7%. It will continue to track lower from here, in our view. Should this pan out, the RBNZ could be brushing up against its Maximum Sustainable Employment objective in a few quarters time. The upshot from all this from an interest rate perspective is that we’re a little more confident in our view that the RBNZ will be able to start reducing stimulus next year. We continue to expect an August 2022 OCR hike, something we note the market is now close to fully pricing. There’s also room for RBNZ bond purchases to be tapered further.

 

Contact us

Jane Turner

Senior Economist

Originally hailing from sunny Nelson, Jane moved to Auckland to join the ASB team in 2008.  As Senior Economist, Jane's main focus is co-ordinating the team’s macro-economic forecasts.  In this key role, Jane was thrilled by the team’s twice consecutive win of the Consensus Economics Forecast Accuracy award.   

During her decade-long career in economic forecasting, Jane has gained a thorough knowledge of the New Zealand economy.  Her current focus is on New Zealand GDP growth, including both manufacturing and the construction sectors.  She has spent time forecasting most sectors of the economy, including inflation, trade, housing, labour and financial markets.

Prior to joining ASB, Jane honed her macro-economic forecasting skills at the Reserve Bank of New Zealand.  Jane is a qualified scarfie, attending Otago University and graduating with a Bachelor of Commerce in Economics with 1st class honours.  In 2014, she took a career break from ASB to travel the world and learn to snowboard.

Mark Smith

Senior Economist

Mark joined ASB in 2017, with over 20 years of public and private sector experience working as an economist in New Zealand and the UK.

His resume includes lengthy stints at ANZ and the Reserve Bank of New Zealand, and he has also worked at the Bank of England, HM Treasury and the New Zealand Transport Agency. Mark's areas of specialisation include interest rate strategy, macro-economic analysis and urban economics.

Born and bred in the Waikato, Mark studied at Waikato University where he graduated with a Master of Social Sciences, majoring in Economics.

Mark's key strengths are the ability to use his extensive experience, inquisitive nature, analytical ability, creativity and pragmatism to dig a little deeper and to deliver common sense solutions to tackle complex problems.

When not at work Mark likes to travel, keep fit and spend time with his friends and family.

Mike Jones

Senior Economist

Mike joined ASB in 2019 armed with almost 15 years of experience in applied macroeconomic and financial markets analysis.

Mike's career has been all about distilling the risks and opportunities of economic and financial market trends for business. Basically asking the "what does it all mean" question. Mike's enthusiasm and skill for drawing out practical, commercial insights from the murky world of economics has been honed over a relatively broad base of experience.

After spending the early part of his career on the tools at the Reserve Banks of both NZ and Australia, Mike had a lengthy stint at BNZ where he was NZ’s top-ranked currency strategist. His regular and topical macro research also saw him pick up several FX forecast accuracy gongs from Bloomberg.

Drawn in by the prospect of putting strategy into practice, Mike moved from Wellington to Auckland in 2013 to join Fonterra as GM Treasury Risk Management. In this role, Mike lead Fonterra’s macroeconomic research output, and was responsible for the strategy and execution of Fonterra’s foreign exchange, debt, and interest rate hedging programmes.

mike.jones@asb.co.nz